Oversold global bonds may be set to rally

Oversold global bonds may be set to rally

Global bond markets may be set for a rebound this fall after being roughed up by the threat of rising interest rates this summer, says Tyler Mordy, ETF strategist and co-CIO at HAHN Investment Stewards in Toronto.

“Global bonds are definitely oversold at this point,” Mr. Mordy said. “Even if a multi-year bear market in yields has begun, a significant counter-trend rally is highly probable in the coming months.”

Mr. Mordy said the direction of bonds in the near term will largely depend on the U.S. Federal Reserve’s potential tapering of its bond buying program. Most analysts believe the central bank will begin tapering in September.

He said the Fed is likely to introduce tapering that is less than forecast or it will introduce stronger forward guidance, which will push out forecasts for interest rate hikes.

“Both are bullish for global bonds,” he said.

Some bond investors are turning away from the U.S. and toward Europe, where the European Central Bank is still committed to keeping interest low for a long time, but Mr. Mordy thinks the better play is to do just the opposite.

He said the major macro fault lines in the world still reside in Europe and its countries remain hostage to an unworkable monetary union.

Bond markets in peripheral countries, meanwhile, are still vulnerable to rigid austerity measures, debt traps and other systemic risks.

“A better way to play the coming bond rally is through US treasuries,” he said.

“That country has made the most fiscal progress (the deficit will likely come in under 4 percent this year). Plus, the ‘senior currency’ always becomes chronically strong during periods of global deleveraging and slow growth. Some have called that the ‘exorbitant privilege’ of the US — however, we think they continue to be the world”s safe haven for some time.”

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